Lending to British businesses falls at record pace

Lending to British businesses fell by £4.3bn in December, the Bank of England
said on Thursday, in a further sign of banks' persistent unwillingness to
lend.

By Angela Monaghan, Economics Reporter

11:43AM GMT 18 Feb 2010

Net lending on an annual basis was down 8.1pc. which was the weakest since comparable records began more than a decade ago.

The Bank said in its Trends in Lending report that lending in the fourth quarter fell across all the main sectors of the economy, for a third consecutive quarter.

The trend partly reflects a reluctance to lend on the part of Britain's banks, as they seek to rebuild their balance sheets in the wake of the financial crisis and increase the amount of capital they hold as required.

"Banks are trying to recapitalise so their lending criteria is tighter and they want to lend lower volumes to businesses and households. It's going to be a long process that stretches over a number of years, it is not going to be solved overnight," said Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club.

Larger companies are also turning to alternative sources of funding, including corporate bond and equity issuance. Reflecting this the Bank said demand for corporate borrowing from the UK's major lenders covered in the report remained weak.

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Mr Goodwin said larger companies were finding "better and cheaper" ways to raise money in the current climate, but said small and medium-sized businesses were still struggling to borrow.

Separate figures from the Bank showed the slowest annual growth in the M4 or broad money supply since February 2000, with growth of 5.1pc. The growth in M4 lending was also at its lowest since December 1994.

The Council of Mortgage Lenders added to the downbeat news when it said gross UK mortgage lending fell by £4.3bn in January to £9.1bn from £13.4bn in February. In January 2009, mortgage lending was 21pc higher at £11.5bn. However, the CML said mortgage lending historically dipped in January, and put the larger-than-average fall down to buyers rushing to complete their home purchases in December before the stamp duty holiday expired. It said there was "a period of uncertainty" ahead for the housing market.

The CBI offered a more positive view, reporting that manufacturers expect production to pick up slightly over the next three months, with companies in the sector the most positive about output for almost two years. Of 548 manufacturers surveyed, 25pc expected output to rise in the next three months, while 18pc expected a fall.